As Revlon prepares to negotiate its restructuring after filing for bankruptcy last week, the American cosmetics group still does not know the identity of all its key creditors, a consequence of a bizarre banking mistake.
In August 2020, Citigroup mistakenly used its own money to repay a $900mn term loan it administered on behalf of Revlon that was held by multiple asset management groups. Holders of $400mn of the loan quickly returned the erroneous payment. However, funds that owned $500mn of the loan, many furious with Revlon over a previous debt restructuring, kept the cash.
In 2021, a federal judge in New York said those who held on to the repayment were legally entitled to do so. Citi appealed against the decision. With the higher court yet to render a final ruling, Revlon faces the possibility that the repaid lenders will be forced to give back the proceeds and become Revlon creditors again.
Citi said in securities filings, however, that if the original decision is upheld it will assume the $500mn claim against Revlon, pitting the Wall Street titan against a loyal client. Revlon said it was prepared for that potential fight, writing in court papers that it “reserve[s] all rights and defenses with respect to any claim Citibank may assert against the debtors.”
The Revlon bankruptcy was already complex. In recent months, a liquidity crisis has engulfed the company, long controlled by billionaire Ron Perelman, leaving the court-supervised Chapter 11 process as its only avenue to stay afloat.
A lawyer representing Revlon said on Thursday at an initial court hearing that it was “frustrating” that the fallout from the Citi error remained unresolved. It has pitted the company against loan and bondholders as well as left simmering tensions among various creditors.
According to the company, the bankruptcy filing was not precipitated by a lack of demand for its beauty products, but by supply chain hiccups, labor disruptions and inflation, which had left it short of cash and working capital.
“[B]because many of the company’s competitors have more cash on hand, they have been able to build more inventory in advance, invest in stocking up on components and raw materials, and pay up front or a premium where needed to secure additional supplies,” Revlon wrote in its bankruptcy declaration last week.
According to the filing, the company’s debt exceeded $3bn. It has only $13mn in cash and generated just $300mn in operating cash flow in the past 12 months.
Revlon held restructuring talks with creditor groups, but the uncertain status of $500mn of loans made negotiations over a major tranche of debt impossible. “The company effectively has had, since August 2020, no 2016 Term Loans counterparty with which it can negotiate,” according to the bankruptcy filing.
Holders of the $500mn in loans not returned to Citi included such prominent groups as Brigade Capital Management and HPS Investment Partners. Their recalcitrance stems in part from a controversy over an $880mn loan taken out by Revlon in May 2020 amid the early pandemic crunch.
As a part of that transaction, the company transferred the intellectual property underlying such Revlon labels as Elizabeth Arden, Almay and American Crew to a new subsidiary called BrandCo, with the loan secured by those assets. The new loan pushed an existing 2016 Revlon senior loan down the repayment rankings, a move that infuriated some of the investors who held that loan.
An August 2020 lawsuit filed by a subset of existing company lenders, who believed that Revlon had rigged the BrandCo financing approval vote among existing lenders, called the maneuver a “sham”. Revlon has denied wrongdoing.
That lawsuit was filed just a day after Citi wired the $900mn repayment by mistake. It only intended to wire $8mn of interest but a data entry error lead to the principal repayment miscue. Should the US appeals court let the funds keep the repayment, it will be a windfall for those groups because they will keep 100 cents on the dollar while the loan on the open market trades at distressed levels.
Lawyers for the repaid lenders in the bankruptcy court hearing on Thursday described their clients as only “contingent creditors” who since they have already been repaid will not need to participate in the bankruptcy fight unless the appeals court orders them to return the cash to Citi.
Citi has said that if the repayment ruling stands then it is prepared to become a Revlon creditor. “As a result of the [lower] court’s decision, Citi now has rights as a creditor related to the Revlon loan,” the bank recently wrote in a securities filing.
Other creditors as well as Revlon shareholders are carefully watching what happens to the Citi claim as its rank would influence the amount available for recoveries of other stakeholders.
The bankruptcy court has already approved $575mn in financing provided by existing senior lenders that will fund the company through the case. Revlon’s lawyers conceded in court that resolving both the Citi repayment lawsuit along with the property of the 2020 BrandCo financing transaction will be key issues in the bankruptcy.
“What’s tricky with the Revlon bankruptcy is that you have to figure out not only how to split the pie — which is the typical issue — but also how big the pie is and who actually owns the slices,” said Elisabeth de Fontenay, a professor of law at Duke University. “That will make things complicated and possibly slow down the process.”
The bankruptcy financing does not require a restructuring plan to be filed until November and the company said that by then it hoped its operating performance will have rebounded.
One person involved in the case said analyzing how much Revlon could be worth, a traditional function of the bankruptcy process, would eventually become the central issue of the case after the capital structure wrangling was sorted out.
Even as Revlon loans and bonds are trading at distressed levels, the company’s equity market capitalization remains about $200mn. “This is really set up to be a hardcore valuation fight,” the person said.